The Grim State of the States

Paul Jay: . . . There’s a recent report published by James Heinz of the PERI Institute in Amherst, Massachusetts, on what’s happening at state and local government levels as a result of the financial meltdown. Here’s some of what he says: “Public education has already emerged as a major casualty of the current fiscal crisis. Numerous states . . . have announced hiring freezes and other emergency budget reductions at public universities as part of the first round of cuts for the current fiscal year. State universities and colleges will raise tuition and fees to offset the state spending cuts, making higher education less accessible. Public elementary and secondary schools do not have the option to raise fees and must absorb the cuts directly. New York State expects to reduce school aid by 3.3 percent for the 2009-2010 fiscal year, placing additional pressures on local school districts which will almost certainly erode the quality of education in the state through larger class sizes, heavier teaching loads, and a lack of resources to maintain quality teaching staff.” . . . So, first of all, what’s the big picture in terms of the meltdown and local government?

James Heintz: The Center on Budget and Policy Priorities in Washington, DC, that looks and tracks state revenues and local government revenues estimates that the current shortfall that states are facing throughout the country is around $190 billion in total budget shortfalls. This is unequally distributed across states. Some states are doing a lot better than others. States like New York are facing a $10 billion shortfall. California — it’s up to $30-40 billion shortfall. It’s a very serious situation. 190 billion dollars is roughly 28 percent of total state budgets nationwide, and it’s the biggest single shortfall on record. Luckily, the stimulus package that was passed earlier this year has helped to mitigate that problem, at least in the current fiscal year, and it’s reduced that $190 billion shortfall by about $70 billion. But still it means that states are facing up to a $120 billion shortfall in the current fiscal year.

PJ: What are some of the other consequences of this shortfall? I opened by talking about public education. What else will be affected by this or is being affected?

JH: Well, you just have to look at where states spend their money. And states are pretty much on the front line of delivery in terms of social spending — on education, yes, but also in terms of health care, in terms of a wide variety of social services, services to the disabilities, services to the elderly — and all of those programs are being cut. Another serious casualty of the shortfall is state employees. There are large reductions or a lack of hiring at the state level that’s contributing to the ongoing unemployment crisis in the country.

PJ: Now, in the last few years prior to the crash, there were quite a few boom years. Why are states and local governments in such a situation?

JH: What we saw happening during the boom years is that states didn’t anticipate the current crisis. So what we saw happening in many states is that they were enjoying high levels of revenues because we were in an economic boom, so they engaged in tax cuts. They thought that they should give back those revenues to the people. And it’s politically expedient to do that. You can win elections if you argue for tax cuts. But those tax cuts only made the budget sustainable as long as the boom was sustainable, and when the bust came around, revenues fell, tax rates were well below the levels needed to maintain current government spending, and we ended up in the deficit position that we are in now. Also, it’s important to remember that almost every single state has a requirement to balance its budget. It can’t borrow the way the federal government can borrow in order to bridge a shortfall between the bust years and boom years. And so what we see is that when government revenues — state government revenues and local government revenues — fall, the only response to that is to either cut spending or raise taxes, and that’s what’s happening around the country right now.

PJ: So in boom times, the states and local governments are cutting taxes under political pressure, and then in lean times, in a deep recession, they’re cutting jobs and freezing wages and such, which, I guess, must play a factor in actually exaggerating the extent of the crisis.

JH: That’s exactly right. As we know, one role of government during an economic crisis is to actually try to stimulate economic activity. And here, just given the structure of how state and local government finances work, they’re forced to cut spending or raise taxes during the shortfall. Now, the one part of government that can help reverse this situation is the federal government, because the federal government can run a deficit and it can borrow against future revenues in order to make up for these types of shortfalls. And that was the logic behind a large portion of the stimulus package: the stimulus package included aid to state governments. . . .

It’s interesting to look forward and see how this all is going to play out over the next few years, because the projected shortfalls for fiscal years 2011 and 2012 for state governments are going to be, total for both of those years, about $260 billion. . . . And the stimulus bill was a two-year bill, so it’s going to run out at the end of December in 2010. But states are going to be making their 2011 budgets. They will have to get those approved by July 2010, because the fiscal year runs from the middle of 2010 to 2011. So early next year we’re going to see, without additional federal action, even larger spending cuts and pressure for raising taxes from the state level. That’s going to slow the recovery.

PJ: Well, it should deepen the spiral of recession: less payments into welfare, more teachers laid off, policemen and firemen, and freezing of new hiring, and probably more layoffs at the state level.

JH: Absolutely. And the Center on Budget and Policy Priorities in Washington, DC, estimates in 2011 and 2012 up to 900,000 state employees will lose their jobs at a time when we are expecting job creation to start kicking in. So all of these dynamics at the state level are going to undermine the recovery and undermine the goals of the stimulus package that has been passed earlier this year.

PJ: Well, if these are the conditions, it’s unlikely there is a real recovery coming, isn’t there?

JH: Well, it’s hard to tell, it’s hard to predict the future, and I’m not going to necessarily do that here. And even the numbers that I just gave, the $260 billion shortfall over the next two fiscal years, that’s based on some projections. One thing is clear: the recovery will be slower or the crisis will be prolonged because of these types of dynamics.

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